KPJ’s 1HFY13 core earnings of MYR50.4m missed both consensus and our  expectations  due  to  continued  losses  at  its  new  hospitals.  In  view of  the  potentially  longer-than-expected  gestation  period  for  its  start-ups,  we  slash  our  FY13F-15F  earnings  forecasts  by  11.7-31.1%.  Based on  an  unchanged  26x  FY14  P/E,  we  lower  our  FV  to  MYR6.13  (from MYR7.30). Downgrade to NEUTRAL. 
 
- Earnings  disappoint.  KPJ’s  1HFY13  revenue  rose  7.4%  y-o-y  to MYR1.13bn, driven by higher contributions from all its core operations in Malaysia, Indonesia and Australia. EBITDA, however, slipped 16.5% y-o-y  to  MYR109.5m.  We  attribute  this  to  the  start-up  costs  incurred  in relation to some of its new hospitals as the group rolls out its aggressive expansion  plan.  Overall  core  earnings  amounted  to  a  disappointing MYR50.4m, down 26.0% y-o-y, which was short of both consensus and our  expectations  -  at  33.8%  and  34.3%  of  the  respective  full-year estimates. Meanwhile, the group’s 2QFY13 revenue of MYR587.7m was better  both  y-o-y  and  q-o-q  but  its  core  earnings  of  MYR25.3m  were 27.3%  lower  y-o-y  as  losses  at  its  newly  opened  hospitals  eroded profitability.  

- Dividend the sole consolation. Management declared a second interim DPS  of  2.0  sen,  bringing  its  YTD  DPS  to  4.0  sen,  for  a  payout  ratio  of 52.3% vis-à-vis 48.4% in 1HFY12.

- Revising  earnings.  The  subpar  results  marked  KPJ’s  second consecutive  quarter  of  earnings  disappointment  owing  to  continued losses  at  its  new  hospitals.  In  view  of  the  potentially  longer-than-expected  gestation  period  for  its  start-ups,  we  are  cutting  our  earnings forecasts  by  11.7-31.1%  for  FY13F-15F.  Our  net  profit  estimates  now stand at MYR101.3m-182.7m for the next three years.

- Downgrade to NEUTRAL. Based on an unchanged 26x FY14 P/E, our FV  is  now  revised  lower  to  MYR6.13.  Accordingly,  we  downgrade  our call to NEUTRAL (from Buy) as we adopt a more conservative stance on potential further earnings disappointment given that the group intends to double its capacity to 5k hospital beds in Malaysia by 2020.

Source: RHB